Dell's Net Rises, but Analysts Focus
On Firm's Eroding Profit Margins

Dell Computer Corp.'s
quarterly profit rose 42%, in line with Wall Street expectations, but its shares fell as investors focused on the company's eroding profit margins.

Dell fell to $41.125 in after-hours trading from its Nasdaq Stock Market closing price of $44.0625, up 81.25 cents, and then slid $4.50, or 10%, to $39.5625 in heavy Nasdaq trading Wednesday. The results for Dell's fiscal-first quarter ended April 30 were released after the close of regular trading Tuesday.

The Round Rock, Texas, personal-computer maker said it earned $434 million, or 16 cents a diluted share, compared with $305 million, or 11 cents a share, a year earlier. Revenue jumped 41% to $5.54 billion, from $3.92 billion.

Continues to Outpace Rivals

Dell's chief executive, Michael S. Dell, said the company continues to outpace its rivals, with sales of network servers and consumer PCs leading its revenue gains. Server and workstation sales rose 97% over year-earlier levels, up from the 80% growth rate in the fourth quarter.

Company Profile: Dell Computer

In addition, a decision to accelerate sales gains through lower pricing worked as planned, Mr. Dell said. The company said it jumped over
International Business Machines Corp.
, Armonk, N.Y., to become the second-largest seller of PCs in the U.S. during the period.

"In the fourth quarter, we felt we weren't as aggressive as we could be," Mr. Dell said. "We got more aggressive."

Analysts, however, said a decline in gross margins was larger than they expected and indicated a difficult pricing environment. Gross margins fell nearly a full percentage point to 21.5% of sales, from 22.4% in the fourth quarter.

"It's heading into a much more difficult sales environment," said Ashok Kumar, an analyst at U.S. Bancorp Piper Jaffray. He now projects sales for the current quarter to rise just 34% to $5.81 billion, from a previous estimate of $5.9 billion.

'Not Like the Old Days'

"It's not like the old days when Dell's margins expanded as Compaq's blew up," said analyst Don Young at PaineWebber Inc., who recently lowered his recommendation on the stock to "neutral" from "attractive." "This would be far worse if Dell didn't have a spectacular performance in servers," he said.

The average selling price of a Dell PC fell 7% to $2,300, from $2,475 a year earlier. The price decline reflects lower parts costs and the first period in which Dell has sold PCs for less than $1,000.

"You can't look at a 42% profit increase as terribly disappointing," said William C. Conroy, an analyst Sanders Morris Munday. However, he added, the margin erosion "was a little bit heavier than we were looking for."

Mr. Dell said the company continued to struggle in Germany, where fierce pricing has slowed sales gains. Its European sales rose 29%, well below a 45% gain in its Americas regions and a 48% gain in its Asian sales.

"We're certainly working on reaching our full potential in Europe," Mr. Dell said. "There's work to be done there."

Strong Demand for Network Servers

The chief reason that margins didn't decline further was that demand was strong for Dell's network servers during the quarter, according to market researchers. "Dell regained the momentum in servers it had coming into the fourth quarter last year," said Kimball Brown, chief analyst at researcher Dataquest, a Gartner Group Inc. unit.

In the fourth quarter ended Jan. 29, Dell's revenue gains slowed to a 38% year-over-year increase as a result of server-sales losses to rivals IBM and
Compaq Computer Corp.
, Mr. Brown recalled. "Neither of those two was as hungry in the first quarter," he said.

In the U.S., the world's largest PC market, Dell's PC-unit sales are within striking distance of market leader Compaq, of Houston. Market researcher International Data Corp. estimates the direct seller shipped 1.45 million PCs in the first three months of the year, just 132,000 PCs fewer than Compaq did. "Dell has just been extremely strong," said IDC research manager Roger Kay.

The company generated $1 billion in cash from operations during the quarter, pushing its cash and marketable securities to $4 billion, from $2.4 billion a year earlier. In addition to using cash for stock repurchases, Dell recently launched an effort to take minority stakes in companies that may aid its revenue gains. It has discussed making investments in drkoop.com Inc., an online consumer health-care information provider, and NaviSite Inc., an Internet-hosting company. No deals have yet been reached, the company said.